A Bank's Treasure Is Retail Banking

THE MOST TRADITIONAL ACTIVITIES IN THE CREDIT INDUSTRY, NAMELY THE COLLECTION OF PRIVATE SAVINGS AND THE GRANTING OF BUSINESS LOANS, HAVE PROVED MOST RESILIENT TO THE CRISIS. IT IS FROM THERE, WITH NEW STRATEGIES AND AND PARTNERSHIPS WITH FINTECH STARTUPS, THAT BANKS CAN RECONSOLIDATE THEIR BUSINESS AND WIN BACK THE TRUST OF CUSTOMERS

by Anna Omarini, Dept. of Finance, Bocconi
Translated by Alex Foti

In the post-2008 banking crisis, the segment that proved most resilient was retail intermediation activities that are usually considered the more traditional ones, consisting of the collection of savings for loans and the financing provided in various capacities to private individuals or SMEs. The bedrock of banks' wealth has always been the stability of deposits, but also its centrality in the payment system. Today, the context of low interest rates and heightened credit risk questions the bank's profit model and bring attention to the need to renew their business model, by developing new market strategies.
 
A premise is in order: although the economic environment has changed, banks are likely to remain rooted in the confidence of savers and lenders towards the bank, its money and professional capabilities to manage funds in the interest of customer demand. As many retail banks are questioning and re-evaluating their business models, because they are often obliged to rationalize their distribution network to reduce operating costs, retail banking offers a disruptive innovation opportunity in entirely traditional credit activities, so that banks can meet the needs of emerging demand.
 
So we have the birth and development of new entrepreneurship in fintech banking, including human-digital services, hybrid real/virtual distribution models, etc. Today, digital technology is the main driver of innovation, enabling the fulfillment of the needs of increasingly demanding financial consumers. This is a new market framework for banks, where it is critical to change strategy and culture. No less important will be the capital needed for the necessary investments and a type of governance capable of taking on business risks that are new to the bank.
 
There is also another interesting element: some of the leading investment banks and financial conglomerates were the the first to focus attention and action on retail banking. Could it be a moment of rebirth through metamorphosis, after a period of maturity?
 
Interesting cases are provided by the launch of Goldman Sachs GS Bank in 2016, born from the acquisition of GE Capital Bank, an online retail bank, aimed at diversifying revenue sources and enhance liquidity. The market to which it is addressed is the so-called mass market, anybody having an Internet connection and a spare dollar to open an account. Goldman then developed Marcus, a fintech company specialized in online lending. And it has also invested in a platform (Honest Dollar) for asset management on behalf of those without a pension plan. JPMorgan Chase has partnered with OnDeck Capital, a lending platform for SMEs that is able to process loans in just a day. In China, there is Alipay, a payment system similar to PayPal but owned by Alibaba Group, which managed to involve three times the volume  of PayPal payments in 2015, and has an estimated value of $900 billion. In Italy, Mediobanca with its controlled CheBanca is developing multi-channel digital and human services with the aim of combining expertise and technology also through the use of roboadvisory. For its part, Unicredit has launched BuddyBank, a molecular bank catering to all those who have a smartphone.
 
Therefore, for banks accelerating growth means to acquire and partner with financial tech companies which can bring in process skills and technology platforms. There are hundreds of startups endowed with the talent and the funding needed to work on various alternatives to the traditional banking model. The focus of their activities is often to eliminate intermediation by inviting a more active role on the part of consumers, because competition is still on costs. The retail banking market is vast and there is certainly room for many competitors. But there must be a clear strategy from the start.